Asian equities traded lower Thursday following declines in U.S. stocks and government bonds, triggered by robust economic data that raised concerns about the Federal Reserve’s timeline for potential interest rate cuts. Australian and Japanese markets experienced early losses, while an index tracking U.S.-listed Chinese firms also dipped.
The news comes as investors react to U.S. economic data showing a solid expansion in the third quarter, leading many to question whether rate cuts may be delayed. Although Treasuries were mostly steady in Asia, Australian and New Zealand bond yields rose in response to the data. Furthermore, U.S. futures declined after Microsoft Corp.’s shares fell by nearly 4% in post-market trading, following a downbeat second-quarter forecast. The S&P 500 ended down by 0.3%, while the Nasdaq 100 lost 0.8%.
Recent U.S. economic indicators have painted a picture of steady, if not blistering, growth. Data showed that the U.S. economy continued to expand in the third quarter, driven by consumer spending and increased defense expenditure. Additionally, core inflation rose by 2.2%, aligning with the Federal Reserve’s long-term target. Despite previous expectations of a quicker timeline for rate cuts, the new data have prompted traders to reconsider their stance, raising concerns that rate cuts might not arrive as soon as anticipated.
Bret Kenwell, an analyst at eToro, noted that a “solid but not blistering growth” scenario aligns well with the current economic outlook, albeit with a potentially slower path to rate cuts. “It’s far better to have a strong economy and earnings driving stocks higher rather than hopes of easing monetary policy from the Fed,” Kenwell explained, emphasizing that the market is more likely to experience sustainable growth based on economic fundamentals rather than policy interventions.
In Asian trading, Japan’s Topix index and Australia’s S&P/ASX 200 both opened lower on Thursday, losing 0.3% and 0.2%, respectively. Additionally, the dollar showed little movement, though implied volatility on the Bloomberg Dollar Spot Index surged to its highest level since December 2022, indicating market caution regarding potential swings in the U.S. currency. This anticipation for volatility points to investor concerns surrounding possible economic or geopolitical shifts that could influence currency movements against peers like the euro, yen, and yuan.
Oil prices, meanwhile, extended gains, with West Texas Intermediate crude up by 0.5%, trading at $68.93 per barrel. Gold maintained steady levels at approximately $2,787 per ounce, buoyed in part by demand driven by uncertainty in advance of next week’s U.S. presidential election.
The Asian and global markets are currently awaiting several high-stakes events with implications for both stock and bond markets:
Bank of Japan’s Rate Decision: The Japanese yen remained stable around 153 per dollar as investors awaited the Bank of Japan’s upcoming decision. Economists largely expect the bank to hold its benchmark rate steady at 0.25%.
Typhoon in Taiwan: Taiwan has preemptively suspended trading on its stock exchange Thursday as a powerful typhoon approached the island. This measure was implemented to protect financial operations amid potential disruptions caused by severe weather.
Inflation and Employment Data in the Eurozone and U.S.: The Eurozone is set to release Consumer Price Index (CPI) data and unemployment figures on Thursday, while the U.S. will publish personal income, spending, and PCE inflation data, along with initial jobless claims.
Corporate Earnings from Amazon and Apple: Tech giants Amazon and Apple are expected to release their earnings reports, which may influence market sentiment given these firms’ impact on the broader indices.
Investor sentiment in the U.S. appears to be entering a favorable seasonal period for equities. Typically, stocks tend to perform well in the final quarter of the year, and with the U.S. presidential election just around the corner, optimism could lead to a market rally once election-related uncertainties settle. Analysts from Barclays Plc, led by Emmanuel Cau, highlighted that investor sentiment could see a shift towards “animal spirits” after the election, with investors currently in a “wait-and-see” mode.
Moreover, institutional investments, including hedge funds and systematic strategies, increased their equity holdings in October. This followed a period of caution in September, pointing to renewed confidence as year-end approaches. Investors are, however, remaining cautious with trade volumes remaining low and activity moderate in light of upcoming earnings releases and policy announcements.
With the U.S. presidential election in focus, market strategies are diverging over potential outcomes. A win for Donald Trump is generally perceived as favorable for stocks, as his tax proposals and pro-business policies could further enhance corporate earnings. However, strategists at Citigroup Inc. caution that a complete Republican sweep could also trigger a market pullback due to what they described as “near-euphoric sentiment” potentially driving the S&P 500 toward unsustainable highs.
This dual view demonstrates the market’s complex reaction to political developments, with some analysts predicting that renewed investor confidence could outweigh concerns over market overvaluation, at least in the near term.
- China Manufacturing and Non-Manufacturing PMI (Thursday): The Purchasing Managers’ Index (PMI) data could provide insight into the health of the Chinese economy amid ongoing recovery challenges.
- Bank of Japan Rate Decision (Thursday): The decision will likely impact yen levels and potentially provide clarity on Japan’s monetary policy trajectory.
- Eurozone CPI and Unemployment Data (Thursday): Inflation and job figures from Europe are expected to guide the European Central Bank’s upcoming decisions on monetary policy.
- U.S. PCE Inflation Data (Thursday): This report, along with initial jobless claims, will provide insight into consumer spending trends and inflation in the U.S.
- China Caixin Manufacturing PMI (Friday): A key indicator of economic performance in China, potentially affecting global growth outlooks.
- U.S. Employment and ISM Manufacturing Data (Friday): These metrics are likely to influence the Federal Reserve’s stance on rate cuts.
